Fed weighs another rate reduction

January 31, 2008 5:11:28 AM PST
Individuals and businesses are likely to see their borrowing costs drop further as the Federal Reserve weighs another interest-rate reduction to bolster a sagging economy. Fed Chairman Ben Bernanke and his colleagues are scheduled to open a two-day meeting Tuesday afternoon to plot their next move on interest rates. The closed-door gathering comes amid growing fears the country is either on the brink of a recession or has already started slipping into one given the strains from a housing market collapse, a global credit crunch and turbulence on Wall Street. The country's last recession was in 2001.

Many economists believe the Fed will lower its key rate, now at 3.5 percent, by as much as one-half percentage point to 3 percent when policymakers wrap up their meeting Wednesday afternoon.

If that scenario plays out, commercial banks would be expected to lower their prime lending rate by a corresponding amount from 6.5 percent to 6 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Should all this happen, then both the Fed's key rate and the prime rate would be at nearly three-year lows.

In an emergency gathering convened by Bernanke last week, the Fed ordered a rare, three-quarter-point reduction to its key rate. That move came after stocks worldwide plummeted, intensifying recession fears. The Fed's action has helped to restore some confidence among skittish investors. However, financial markets remain fragile.

"My feeling is if they don't cut by a half point, they risk undoing the good they did last week with the three-quarter point cut," said Mark Vitner, economist at Wachovia.

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